Contingency Planning: An Essential Part of Strategy

Establishing a company’s strategy and plan is mostly done in an atmosphere of optimism about the near-term future. Ironically, this is also the best time to consider steps you will take should unforeseen challenges confront your business. Contingency planning helps your leadership team prepare in advance for things you hope will never come to pass.

Here are a few tips to consider.

Bring your team together and develop a contingency plan and budget with revenue projections and recommendations for expense reduction. Be specific and detailed. Resist the temptation to be overly optimistic about how long it will take for things to get “back to normal.” Better to overestimate the financial impact you will encounter than the other way around.

At a high level, this starts with totaling up the company’s liquid reserves (cash, cash equivalents and marketable securities). Next, determine your monthly budgeted expenses. A simple calculation will tell you how many months the organization can “keep the lights on” should revenues take a significant drop.

Next, review your annual operating budget and determine fixed and variable expenses (this should have already been done as a first step in calculating break-even levels for products and services). Determine expenses that would be the first to be eliminated, reduced and/or deferred. Top tip: Go deeper than you think is necessary. You may not get a second chance at this.

Plan to reach out to your suppliers and determine the extent to which they will work with you to slow deliveries and/or defer contracts and existing agreements.

Review this plan with your advisors, your banker (if appropriate) and if you have one, with your Board of Directors. Consider their input and feedback before finalizing the plan.

Develop a communication plan to inform your stakeholders should you need to put contingencies into action.  Each stakeholder group should receive a version of the message that is appropriate and customized for them.

Plan to be in frequent, scheduled contact with your stakeholders during the period of adjustment. Stick to this schedule even if there is not much new to report. Hearing from the organization on schedule as promised helps build a reputation for reliability and trust, a valuable commodity at any time but especially during a business downturn.

A final thought. Developing and communicating a contingency plan and budget brings into sharper focus a general lack of financial acumen on the part of so many employees. This lack of understanding of what is required for a business to generate a profit isn’t anyone’s fault. It simply isn’t taught in any organized, structured way (except for those who chose to study finance and/or economics). Yet an understanding of the basics of finance and business has value for everyone, at work and at home as employees attempt to make sense of their own household budgets and savings plans. Why not take this opportunity to plan for basic financial and business training for your team members?

For more information and sample resources, contact me at joe@ajstrategy.com.